When you’ve found the perfect property, the prospect of competing against other buyers at auction can be pretty intimidating. But if you make a pre-auction offer which the seller accepts, you can skip the auction completely. This can be hard to pull off in a competitive market, but sometimes it's worth a shot.
When is a pre-auction offer a good idea?
Auctions are an incredibly popular way to sell homes in Australia. And it's easy to see why. After all, there’s no upper limit to what one could receive at auction, and the competitive bidding environment can serve to push prices skyward.
But there are plenty of reasons why a vendor might want to avoid auction.
Auctions can be expensive. When taking into account marketing and the services of an auctioneer, Openagent.com.au estimates the expense of auctioning a $700,000 home could be between $6,000 and $9,000. When you add in real estate commission, this eats into your profits.
Auctions can take time. Some sellers may have already found another property and may be keen to sell their old property as quickly as possible. In a situation like this, a four-week marketing campaign for an auction can seem like an eternity and they may be keen to sell the property faster.
The best thing to do is to ask the real estate agent if the seller is open to a pre-auction offer. The worst they can do is say no.
How to make a pre-auction offer
Do the research
Before you make an offer on a property, make sure you know enough about its value to put forward a serious offer. As a buyer, your goal is to work out a price that's both suitable for you but also competitive enough to persuade the seller to skip the auction. This is a delicate balance to find and might be impossible in a hot market with many bidders.
Any property going to auction has a price guide that gives you some indication of the selling price. But this is far from the only factor determining the price a property is likely to attract.
Check recent, comparable sales
You can usually get a rough idea of the median price for similar properties by searching the property’s address on Domain or realestate.com.au. To get an even better idea, look at recent sales of similar properties. You’ll need to put some time in doing research to find truly comparable properties. Remember, not all two-bedroom houses are created equal, so pay attention to the condition, floor space, land space and amenities of the other sales in the area.
Track some properties that are listed for sale, and pay close attention to price guides prior to auction and the final selling price. You may notice a trend of properties selling well above the price guide. This makes it harder to come up with a pre-auction offer because sellers will expect a competitive auction result.
You may notice a property is up for auction but doesn't sell (it might be listed as "passed in" in an auction results summary online). This may be a sign that the seller is adjusting expectations and could be open to a reasonable pre-auction offer.
Show genuine interest
Demonstrate to the vendor and their agent that you’re interested in the property. You might want to attend several of the open inspections to begin to build a rapport with the agent and show you’re serious about the property.
When you do attend inspections, ask questions. Get as many specifics as you can about the house itself, as well as about the seller, their goals and their expectations. You can also show you’re serious by taking some additional steps to research the property. Ask the agent for the contract of sale, and ask if there’s a building and pest inspection report you can purchase. Taking steps like this can set you apart from the rest of the crowd.
Make a pre-auction offer they can’t refuse
It may seem counter-intuitive, but when you make a pre-auction offer you need to go in bold and aggressive. In most business negotiations, you might want to hold your cards close and hesitate to give too much away. This strategy is unlikely to work when you’re trying to convince a vendor to sell before auction.
Remember, you’re trying to convince the seller that it’s worth avoiding the auction to take your offer. You’re not going to accomplish that with a lowball price.
In addition to offering an enticing price, try to offer enticing terms as well. You can offer a short settlement time, a bigger deposit or even waive the cooling-off period. You want to offer the vendor better terms than they can expect at auction.
Be prepared
If your offer is accepted, you need to be organised and ready to make good on it. This means you’ll need to have your deposit cheque ready to deliver to the vendor as soon as your offer is accepted.
It also means you’ll want to have finance in order for you to move to settlement in a reasonable timeframe. It’s worth getting home loan pre-approval before you make an offer. This means you'll need to compare your options to find the right home loan for your situation.
You also need to be ready to exchange contracts quickly. It could be worth having a solicitor look over the contract of sale before you put in your offer. Remember that until contracts are exchanged, there’s nothing stopping the vendor from entertaining other offers.
Be sure a pre-auction offer is the best strategy
The major caveat to all of the above is to be certain that making an offer prior to auction is a strategy you’re comfortable with. There’s every possibility that a pre-auction offer will see you paying more for a property than if you had gone to auction.
If your offer is rejected, you run the risk of merely adjusting the vendor’s price expectations upwards. This means the vendor and their agent can now tell any other potential buyers that they’ve had interest above the original price guide. Your offer now becomes the floor for everyone else.
If you do choose to make an offer prior to auction, you should do so because market conditions seem to favour buyers, and you think you can secure the property at a reasonable price without competing with others at auction. A pre-auction offer might not always be the right strategy, but if you know what you’re willing to pay and you want to take other buyers out of the running, it could be worth the risk.
If you a pre-auction offer doesn't work, here are some expert tips to give you the upper hand in the auction.
